11 Benefits of Formal Management Systems Outlined for Your Benefit

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11 Benefits of Formal Management Systems Outlined for Your Benefit - At least 11 benefits for your business if you implement formal management systems Now!

Why are formalised management systems so essential?

Although executive management and owners commonly have excellent technical skills in their chosen fields, the creation of company wide management systems usually fall to one side. They are commonly avoided either due to costs, the lack of in-house skills or simply because the need is not perceived.

The problem is that many of the hidden inefficiencies in business are commonly hidden by the structures and culture created since the inception of the business - in fact every inefficient process and cultural hang-over you have in place in your business simply means that you must work harder and obtain more contracts to maintain the same profit as if they did not exist. You might call it "your hidden project: you're working away on it but you just don't know it! ".

These inefficiencies can be revealed by analytically reviewing the business and its management systems, and / or by using formal business systems using a common methodology developed by others. As commented by the statistician Edward Deming, 85% of all failures in business are in systems controlled by management, whereas 5% are due to human error.

without a formal management system, your business suffers from limited control over what you do and how you do it !

Contents Improved results and performance Doing things "right the first time" Procedures and systems Reducing costs associated with inefficiencies Improved control over product liability actions Improved procurement philosophies Management of management, the systems surrounding us during working hours Creating direction, Mission, vision, objectives Process planning as a pre-cursor to IT workflow system.

The beginnings of a Knowledge Management system.

Improved results and performance

Many companies who have approached quality management with a focus on long term business improvements, have gained many improvements in achieving their business goals, improved results and success and increased sales and profit.

For example, "publicly traded Baldridge winners (the USA version of the Australian Quality Awards) significantly outperformed the Standard and Poors index. Over the period 1988 to 1994, the 14 publicly traded winners & outperformed the S&P index by over 4 to 1, achieving a 249% return compared to a 58% return for the S&P 500" (Fortune, Sept. 9, 1996).

An obvious way of improving profits is by reducing the costs of doing business. For example, in Britain, it has been estimated the cost of NOT finding out what the customer needs and then meeting these requirements faultlessly, every time, is costing companies 15 to 50 % of sales turnover.

The average profit made by British companies is 4% of sales and any reduction in quality costs goes straight to profits. Companies operating good quality management systems can reduce quality costs below 5% of sales" (Allcock and Unsworth, 1991). In the USA, costs are typically 10 to 50% of sales, and some companies have reduced this to 3% of sales (Crosby, 1985).

Doing things "right the first time"

Doing things right the first time. It's the aim of every business. Of course, in the open air of a hectic day, it doesn't always turn out this way. This is where formal management systems can really help .

They force management to not only analyse current ways of doing things, but they also have inbuilt mechanisms for review of systems and continuous improvements, so that if you don't get it right the first time, then there is no reason why it should happen that way the next time!

They also force us from the age old habits of blaming causes on "human error" or "that's they way we've always done it" - using some simple problem solving tools, or even dare we say it, "statistics" - errors can be intelligently analysed and removed from day to day occurrence.

For example, Baulderstone Hornbrook Engineering believe that the use of quality management has helped them gain many improvements, such as an improvement in the scheduling for the second Sydney Airport runway project.

"BHE originally estimated the contract to be completed in 120 weeks, (we) targeted 105 weeks and it currently looks like being completed within 100 weeks. Production rates have increased and the workforce is even more committed to the project" (Quality Magazine, April 1994).

At JETSROAD and PARCELINE, they have their own experiences of quality, formal management and TQM practises. In one instance related by the new General Manager , "in the past we had a double address on a carton as a result of a customer error & we used to ring the customer and invariably the answer would be, "thanks very much, will you please fix it?".

No more, if we have a problem (now), we immediately take the carton back to the customer and show all the people responsible for distribution what the problem is. The result is that the problem won't happen again. You Must Eliminate The Problem At Its Source ." (Quality Magazine, Feb 1994).

Procedures and systems

Standard procedures have been in use for some time. In fact, the Romans used standardisation in an interesting way - every Roman military camp was identical in layout and size, so that new legionnaires would be able to easily find their way around a new camp and reduce their natural disorientation. Well if they could do it two thousand years ago, so can you!

Standardisation has the capability to help you build a better internal organisation, with more structure and providing the potential to lower overheads due to mistakes and inefficient systems, as well as maximising customer satisfaction through standardisation of the service to be provided. This is what Gerber meant in his book the eMyth, when he wrote " The Model Will Provide a Uniformly Predictable Service to the Customer ".

Many leading companies employ standard procedures and systems. Evidence of this may be seen from the report "Leading the Way (1994)" commissioned by the Australian Manufacturing Council. This compared the characteristics of Leading companies (ie top 20%) versus Lagging companies (ie. Bottom 20%) and showed 83% of leaders and 46% of laggers have site wide standardised and documented operating procedures

For example, at Van leer Australia, they found quality certification provided better control of processes, consistency from design through to delivery, increased measurement of performance, disciplined approach to business.

They also used Corrective Action Teams, to help achieve continuous improvement which achieved just in time performance and reduced warranty costs. One of the largest privately owned companies in Australia, Transfield, also understand the importance of consistency in their operations brought about by a QA system; "if someone in Sydney is working with someone in Perth, Jakarta or Hanoi, it is important that there be a common way of doing things, an ethos which forms part of the organisations culture" (Quality Australia, Jan 1995).

Reducing costs associated with inefficiencies

Inefficiencies are commonly identified in normal business processes as rework (ie. redoing the same work more than once), wastage of resources and ineffective use of time and expertise. We can visualise this as the hidden job that all of your employees are silently performing, even though they are not aware of it and neither (normally) are management.

Surveys of manufacturing costs indicate that manufacturers spend about 60% on raw materials, 15% on Labour and 25% on overheads. To achieve a 5% reduction in costs requires a 33% reduction in labour, 20% reduction in overheads or 8.3% reduction in materials, which explains why many purchasers are addressing their suppliers QA programs (and thus reducing costs in inventory overheads and material scrap) as a way of reducing costs.

In a survey conducted by the Construction Industry Development Agency (CIDA), the average cost of rework for projects with quality systems = 0.72%, compared to 6.5% for those projects without. At Palmer Tube Mills, a quality assured company with a history of progressive management, their "product nonconformances are at their lowest level ever for one of Australia. s largest steel mill producers" (Quality magazine, Dec 1995).

Improved control over product liability actions

Although not yet proven by case law, there is a strong consensus of legal opinion that a disciplined quality management system & will provide the best possible plea of mitigation in any product liability case (Kokla and Scott, 1992).

Also, Liverpool Insurance Brokers who already implemented a formal management systems using quality management principles, have "benefited by a 20% saving on its premiums for professional indemnity insurance".

The food industry, attacked on two fronts by both increasing consumer awareness and also an increasing number of dangerous microbiological organisms, is also improving its formal management system sophistication with the implementation of a number of industry specific quality standards, including Cattle Care and SeaQual.

With a number of high profile cases where companies have been bankrupted almost immediately after media attention on food scares and poisoning incidents, any form of increased control over the risks of these occurring is not only progressive management, but simply good business sense.

As a confirmation of this statement, simply have a look at your cashflow statements and work out how long your business will survive without revenue in times of public crisis.

Improved procurement philosophies

One element not often attributed to formal management but actually a key cornerstone, is the philosophy of improved procurement systems which take into account the full costs attributed with the purchasing and supply cycles.

By integrating quality focus principles in their business plan, the WATER BOARD OF NSW (contracting and supply division) saved $22 million dollars in procurement savings.

A West Australian government utility also saved a bundle by reducing the number of their suppliers from about 3000 to 1200 - and that was just in the first 6 months! Just imagine their savings in both procurement resources required, and procurement efficiency.

Of course, by ensuring that the total lifecycle costs are taken into account in major and high risk purchases, ensures that not only is the best possible product selected but also that the long term costs to the business are minimised.

Management of management - the systems surrounding us during working hours

We all have a tendency to review the content of the process ie. what we do, rather than the structure of the process ie. how it is that we do it (termed meta-processes , which are the higher level processes which determine the systemisation of a system).

In business management, this may be the way in which management systems are documented, the way in which systems are reviewed, the way in which systems are inspected and tested and so on.

These areas may be reviewed for possible change in a number of ways. They may be reviewed internally, brainstorming possible improvements against current formats or even trying a re-engineering approach where the systems are reviewed against the objectives of the process, as if they were being reviewed for the very first time.

They may also be reviewed by benchmarking against the systems of other firms, which may operate in similar ways. Even those firms which are not similar industries are sure to provide interesting information on the structure of their processes.

Creating direction - Mission, vision, objectives?

Just exactly what does your business stand for? This is the question asked when establishing mission and vision statements, which help to ensure that our business strategies are clearly communicated to all stakeholders, such as your staff, your clients, your suppliers, and hopefully, to you and others like you in executive management.

They are also very effective as benchmarks for management expectations, and like all business culture influencing systems, visions and missions have the power to alter the behaviour of an entire group of people (when they are implemented correctly, of course!).

Everyone in management has considered the need for measurement of your business performance. After all, the taxation department and your accountant require you to do this at least yearly, anyway!

However, more formal measurement of objectives, which take into account both financial and non-financial indicators, and also tangible as well as non-tangible assets, is of paramount importance. It should be a link between your strategic business planning, your formal management system requirements and your 9 to 5pm work day .

We're sure you've heard it before - if you fail to plan then you plan to fail - however in this case it could be extended to if you fail to measure your success, then you may also be failing to measure your failure - by which time it will be too late (or twice as expensive) to do anything about it!

Improved human resources management

For those willing to take the chance and move to more progressive relationships with their personnel, formal management systems such as quality management and business process review can help because of their intrinsic requirements for employee empowerment and changing managerial attitudes to employee participation in workplace decisions.

The Report "Leading the Way (1994)" commissioned by the Australian Manufacturing Council, compared the characteristics of Leading companies (ie top 20%) versus Lagging companies (ie. Bottom 20%). This showed that 77% of leaders and 35% of laggers found that employees believe that quality is their responsibility - clearly a recipe for success!

So, why is it that staff are motivated to act differently when they are included in the processes of business? Some examples why staff are motivated include:

Not being harassed to perform rework yet still meet deadlines

Not receiving customer complaints nearly as much, due to the emphasis on continuous improvement and empowerment to solve customer requirements without needing to follow a burdensome chain of command.

Being involved in the content of the procedures, which specify what they do.
Opens communication lines via audits and management reviews.
Frustration is minimised due to continuous improvement reviews and feedback sessions.

Right now I'm sure you're saying to yourself "prove it to me!", because a lot of TQM initiatives have not been anywhere near as successful as this. However, performed with the best of intentions and with a management team who are prepared to reduce their own power for the good of the organisation, results and success are possible.

For example:

At Transfield, "benefits of quality management principles were not only improvements in time, costs, quality and safety, but also increased levels of confidence and commitment in employees" (Quality Australia, Jan 1995)

At Smiths Snackfoods, financial benefits of a team empowerment process has cost around $200 000, but they expect more than $5 million in returns (The Quality Magazine, Dec 1996)

At Machinery Insurance Services (Sydney), their staff had an increase in awareness of quality management. "Instead of merely correcting errors and chalking it up to experience, attempts are being made to understand why and rectifying the situation.

The staff have already taken up the challenge of getting it right first time & this has lead to revision of documents through staff who are finding better and more efficient ways of doing things in their quality system" (Quality Magazine, Apr 1996)

At Morgan & Banks, the human aspect of a & system & was an unexpected benefit. & the staff are less frustrated, have higher morale and motivation and have improved teamwork. The enthusiasm and commitment to do a better job has delighted management.

The Quality Management System has provided the framework for these results to occur, without stifling the creative nature of the consulting process & the program has resulted in less rework, improved customer follow up, fewer customer complaints, focus on training and induction, and uniformity in service provision.

Essentially this means less wastage of resources and greater productivity and efficiency, all of which positively affect the company. s customers and the bottom line" (Quality Magazine, April 1995)

Process planning as a pre-cursor to IT workflow systems

Once performance indicators are understood and the processes of the business have been implemented, it is then a simple process to analyse processes with regard to information technology improvements.

Of course with information technology there is the distinct possibility that many processes may be eliminated altogether and that a clean slate approach towards process re-engineering may be required - however there is still much information which can be gleaned from the current process maps.

For example, current process flows will indicate the information that a particular manager or person requires before they can complete their tasks. Forms will also identify the metadata required for the process to be a success.

Process flows will identify the amount of information and the timing of information flows for work to succeed, including any work which can be performed in a parallel instead of a sequential flow.

The beginnings of a Knowledge Management system

One area commonly neglected in business yet exploited to great effect in franchising and marketing firms, is the utilisation of company knowledge for competitive advantage or for added revenue generation.

For example, the knowledge tied up in a recently acquired business may be utilised during integration into a group of companies. It may be documented in a manual or incorporated in software which can be on-sold for added value.

The rigour of the quality systems (which are commonly not found in lagging companies) can also be used as part of a succesful turnaround strategy for failing companies in the same industry.